The Resource Loan guarantees : whether deductibility entails (or should entail) taxability

Loan guarantees : whether deductibility entails (or should entail) taxability

Label
Loan guarantees : whether deductibility entails (or should entail) taxability
Title
Loan guarantees : whether deductibility entails (or should entail) taxability
Subject
Language
eng
Summary
Facts: FCo is a limited liability business entity formed under the law of Foreign Country (FC) and is engaged in a trade or business in a number of countries, both directly and through wholly owned subsidiaries. (As used here, a 'subsidiary' is a separate limited liability business entity, but not necessarily a corporation for income tax purposes.) FCo is engaged in a trade or business in Host Country (HC) through a subsidiary formed under the law of HC. The subsidiary is treated as a corporation for both HC and FC income tax purposes. FCo is also treated as a corporation for both HC and FC income tax purposes and FCo has no contact with HC other than through its HC subsidiary. The HC subsidiary (HCo) plans to borrow from a bank operating in HC and, in order to reduce its interest expense, will obtain a guarantee from FCo for the loan (which will have a one year term). Because of the loan guarantee, HCo's interest rate will be reduced by 135 basis points (1.35 percent). HCo has agreed to pay FCo a guarantee fee at the time the loan is entered into. Under the terms of the guarantee, FCo will make the payments due under the loan if HCo defaults and will have the right of subrogation, i.e., it will have the right to recover from HCo any payments it made under the guarantee. Questions: 1. a. Discuss the extent to which HCo is entitled, to a deduction for the value of the loan guarantee. b. Discuss the taxability of FCo by HC on its provision of the loan guarantee. c. With respect to the loan guarantee, does deductibility entail taxability? d. Must a guarantee fee be 'arm's-length'; if so, how is it determined? 2. Assume that FCo is engaged in business in HC through a branch in HCo (HBr), which has incurred guarantee fees to both the head office of FCo and a person related to FCo. a. Discuss the extent to which HBr is entitled to deductions for loan guarantees. b. Is the head office of FCo taxable by HC on its provision of a loan guarantee? c. In the context of a branch, does deductibility entail taxability? 3. Assume that a tax treaty applies and HBr constitutes a PE (HPE) a. Discuss the extent to which HPE is entitled to deductions for loan guarantees. b. Is the head office of FCo taxable by HC on its provision of a loan guarantee? c. In the context of a PE, does deductibility entail taxability? 4. For HC income tax purposes: a. Does deductibility entail taxability? b. When, if ever, should deductibility entail taxability?
Citation source
In: Tax management international forum. - London. - Vol. 31 (2010),
Geographic coverage
International
Language note
English
http://library.link/vocab/subjectName
  • loan
  • guarantee fee
  • deductions
  • intercompany services
  • PE
  • tax treaty
Label
Loan guarantees : whether deductibility entails (or should entail) taxability
Instantiates
Publication
Contents
Argentina p. 4-7; Belgium p. 8-10; Canada p. 11-16; China p. 17-19; Denmark p. 20-22; France p. 23-25; Germany p. 26-29; India p. 30-35; Ireland p. 36-41; Italy p. 42-44; Japan p. 45-48; Netherlands p. 49-55; Switzerland p. 56-59; United Kingdom p. 60-65; United States p. 66-72
Label
Loan guarantees : whether deductibility entails (or should entail) taxability
Publication
Contents
Argentina p. 4-7; Belgium p. 8-10; Canada p. 11-16; China p. 17-19; Denmark p. 20-22; France p. 23-25; Germany p. 26-29; India p. 30-35; Ireland p. 36-41; Italy p. 42-44; Japan p. 45-48; Netherlands p. 49-55; Switzerland p. 56-59; United Kingdom p. 60-65; United States p. 66-72

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